Bernanke played down the biggest jump in the unemployment rate in 22 years in May and said the risk of a "substantial downturn" receded in the past month. Policy makers will need to pay "close attention" to make sure the increase in commodity costs doesn't pass through to broader consumer prices, he said in a speech to a Boston Fed conference late Monday.

The Fed chief's remarks spurred investors to bet that officials will raise rates later this year and sent two-year note yields to their highest level since January. Bernanke and his colleagues are raising the alarm on inflation after oil costs doubled in the past year and companies from Dow Chemical Co. to tire-maker Titan International Inc. raised prices.

"The Fed is looking for a fine balance in dealing with a weak economy and threat to inflation," said Gary Schlossberg, senior economist at Wells Capital Management Inc., which oversees $225 billion. Bernanke's speech "certainly increases the odds that the next move will be a rate increase," he said.

Two-year Treasury yields, more sensitive to Fed rate expectations than longer-dated notes, climbed 12 basis points to 2.83 percent as of 8:54 a.m. in London. Traders anticipate the FOMC will keep its benchmark rate at 2 percent this month and raise it as soon as September, futures prices indicate.

Central bankers "will strongly resist an erosion of longer- term inflation expectations," Bernanke said Monday at the Boston Fed's annual economic conference in Chatham, Mass. Any public anticipation of accelerating price gains "would be destabilizing for growth," he said.

A measure of investors' forecast for consumer price gains in the coming 10 years, derived from the difference in yield between Treasuries and Treasury notes linked to inflation, rose to 2.58 percent Monday. The gap has averaged about 2.06 percent in the past decade.

A gauge of household expectations for inflation over five years climbed to a 13-year high last month, according to a Reuters/University of Michigan Survey.

The Fed faces a "complicated balance" of lowering interest rates to avert a recession "without taking too much risk that underlying inflation is going to accelerate over time," New York Fed President Timothy Geithner said in New York Monday.

The New York Fed, the central bank's main link with Wall Street, also Monday announced an agreement with banks on changes aimed at easing the risk of a collapse of the $62 trillion market for credit-default swaps.

Seventeen banks that handle about 90 percent of the trading in the market will create a system to move trades through a clearinghouse that would absorb a failure by one of the market- makers, the New York Fed said.

Geithner said Monday in his speech that "our first and most immediate priority remains to help the economy and the financial system get through this crisis."

Fed officials have cut the benchmark lending rate to 2 percent from 5.25 percent in September. They next meet June 24-25.

The consumer price index rose 3.9 percent in the 12 months ending in April, up from a 2.6 percent gain a year ago. Energy costs have spurred the gains. AAA, the largest U.S. motoring group, said this month that gasoline surpassed an average of $4 a gallon (3.79 liters) for the first time. Oil prices reached a record $139.12 on June 6.

"The inflationary impulses that we have are beginning to dampen our economic activity," Dallas Fed President Richard Fisher said in an interview with CNBC television Monday. "Nobody at the Fed wants to countenance inflation."

Bernanke said "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." While risks to growth were still to the "downside," he added that federal tax rebates, past rate cuts and record exports should underpin the expansion.

The unemployment rate rose to 5.5 percent in May, the most in more than two decades, as the U.S. lost jobs for a fifth month. Bernanke called the jobless figures "unwelcome," though he added that recent economic data had "only modestly" affected the outlook for growth and employment.

"Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities," Bernanke said. Though "the pass through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited," officials will need to monitor for any change in the situation, he said.

Bernanke's speech "was a marginal move toward more focus on inflation risks," said JPMorgan Chase & Co. economist Michael Feroli, who attended the conference. "It notched down a little bit the concern on growth and notched up a little bit the rhetoric on inflation expectations."